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Free enterprise: Building stronger foundations for the economy

Perhaps, this is something to build on.

The Commerce Department, this week, announced some encouraging news regarding housing starts. According to the release (available at: http://1.usa.gov/uP5CgK), ground was broken on 717,000 homes (seasonally adjusted) in April. Together with the building activity in January, this represents the best two months since late 2008 and an increase of 29.9 percent above the April 11 numbers.

Housing permit applications also are up compared to last April (by 23.7 percent), albeit a tad lower than in March.

While milder than usual weather likely has had an impact, it is continuation of a positive trend. The hope is that this may reflect stronger and growing demand. If that were the case and if the building activities continue, crucial hiring in industries directly and indirectly related to housing might pick up.

Given that those industries were among the hardest hit by the housing bust, this would bode well for the economy overall. The virtuous cycle would go something like: More demand for housing leads to more employment, which leads to more consumer demand overall, including housing and other big-ticket items and so on.

Of course, one aspect that impacts whether the demand for housing is strong is related to financing. It is no secret that mortgage rates are at historic lows. That is, if one can qualify for those rates, given that badly stung banks are reluctant, perhaps too much so, to lend.

Proving that one is a good credit risk is often difficult enough for average-income buyers. This turns out to be even more problematic when other than objective financial measures have an impact on the amount one is asked to pay for a house.

A recent study by four economists looked at something at the core of economic analysis: pricing.

They have access to a novel dataset comprising more than two million transactions in four large metropolitan areas during the period from 1990 to 2008. The regions are Chicago, Baltimore/Washington D.C., Los Angeles and San Francisco.

Being able to carefully account for differences in product attributes (neighborhood and housing quality) and buyer characteristics (such as income, wealth or access to credit), they find a troubling pattern of price discrimination that had not been seen in previous studies on this topic.

According to the results (available at: http://bit.ly/JpiONQ), “black and Hispanic homebuyers pay premiums of around 3 percent on average across the four cities” that were studied.

Given the impact of such higher prices on wealth creation and generational wealth transfers (“this translates to an average premium of about $5,000 per transaction, a substantial amount” relative to average incomes), it is important to conduct follow-up studies to determine whether any institutional characteristics of the housing market facilitate such consistent and unmerited differences. It might be that more resources available to first-time home buyers could alleviate this situation.

After all, anything that makes people more likely to purchase houses they can afford is likely to positively contribute to overall economic activity. One good sign coming out of the study is that “sellers of each race do roughly as well on average when they sell their homes, no matter the race of the buyer.”

This is certainly something to build on.

Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. Reach him at mreksula@georgiasouthern.edu.